The cryptocurrency world is an ever-changing and volatile place, but if you want to minimize the risk of your digital assets losing value due to market fluctuations, stablecoins are a great option. They’re designed to maintain a fixed price relative to their underlying asset or currency which makes them perfect for people who don’t have time to monitor the ups and downs of crypto markets on a daily basis. Find out more about What Is A Stablecoin In Cryptocurrency, Types of Stablecoins and how to make money with it in our article below!
Table Of Contents
- What Is A Stablecoin In Cryptocurrency ?
- Types of StableCoins
- How to Make Money With Stablecoins
- So why are stablecoins so important in cryptocurrency?
- Conclusion | What Is A Stablecoin In Cryptocurrency
What Is A Stablecoin In Cryptocurrency ?
A StableCoin (or asset-backed token) usually attempts to maintain a 1:1 parity with some fiat currency or, in the case of USDC, United States Dollar. As such they are crypto assets that users can redeem for other currencies at any time and have been designed to reduce price volatility.
“The general reasoning behind this type of system is that it provides an interface similar to a fiat currency where you can deposit and withdraw funds”. These digital assets typically use collateralized debt positions or loans against real assets in order to generate the necessary funds for maintaining their peg.
For example, Tether uses USDT as a way of being able to provide a stable crypto asset, claiming that each USDT is backed by one US Dollar and allowing users to convert digital currency to fiat currency. Tether Limited issues tokens through the Omni Layer Protocol which is built on top of the Bitcoin blockchain as described in their whitepaper: “The Tether Platform issue or burn tethers based on user demand to facilitate transactions between cryptocurrency exchanges, OTC markets and other apps without traditional banking infrastructure.”
In order for them to be able to uphold this promise to redeem all USDTs for USD at any time, they must have enough USD either in their own reserved bank accounts . Their assets are held by Tether Holdings Limited (BVI) who then provide these cryptocurrencies to Tether Limited who gives them to users that wish to have a stable asset.
Types of StableCoins
Since we’ve known What Is a Stablecoin In Cryptocurrency, Let’s now check out 4 types of stablecoins. There are currently four broadly adopted categories of stablecoins:
Fiat-collateralized stablecoins maintain a fixed peg to the value of sovereign currency such as the pound or the US dollar, In order to issue a certain number of tokens, an issuer must have reserves worth one for every token they want issued in their possession at all times.
Crypto-collateralized stablecoins are digital tokens that hold a value equivalent to their underlying cryptocurrency in an escrow account.
They allow investors to de-leverage their positions without cashing out by selling cryptocurrencies directly for fiat (i.e USD). Like any currency, both forms of collateralized stablecoins are subject to macroeconomic factors such as inflation and interest rates.
However, the specific characteristics of blockchain technology provide unique advantages that make these currencies much more resilient in the event of a financial crisis.
3. Algorithmic StableCoins
Algorithmic stablecoins eliminate the volatility of cryptocurrency and provide stability in price.
They use an algorithms that manage the supply of tokens in circulation, making them resistant to inflation or deflation. Algorithms can adjust prices by adding more coins into circulation when they’re overpriced relative to their correlating fiat currency (like USD) or remove some number of coins if they’ve become undervalued.
4. Commodity-Backed Stablecoins
Commodity-backed stablecoins are collateralized using physical assets like metals, oil, and real estate.
The most popular commodity to be used as collateral is Gold: Tether Gold (XAUT) and Paxos Gold (PAXG) are two of the most liquid gold-backed stablecoins.
However, it should not go without saying that these commodities do fluctuate in price just like any other asset on the market today – this means they could potentially lose value over time.
How to Make Money With Stablecoins
Since we’ve known What Is a Stablecoin In Cryptocurrency, Let’s now check out 3 ways to make money with stablecoins.
Staking stablecoins is a fantastic way to make money. Stakers are essentially locking in their tokens into the blockchain, which rewards them with interest on their coins. It’s a newer concept for sure, but one that most traders are looking to take advantage of.
Buying stablecoins has become a popular strategy among cryptocurrency traders. The coins are traded on exchanges, and investors can buy them at one platform, find an even higher price elsewhere, then sell it there before the latter updates their prices to take advantage of any difference. Traders love this quick and easy way to make money because they always profit if quickly sold again within that time frame.
3. Decentralized Finance [DEFI]
Check out some DEFI projects, Many of these allow you to earn money on them while participating with stablecoins. However, the one that will provide the most profit depends greatly on what your priorities are in terms of risk and reward rates. Spending time researching different stablecoins is a good idea before making any final decisions about which ones to choose from when looking for an investment opportunity.
So why are stablecoins so important in cryptocurrency?
1. Stablecoin can be used to avoid price volatility and price speculation of cryptocurrencies.
2. Stablecoins don’t have the same volatility as traditional crypto assets like Bitcoin, Ethereum or Litecoin which makes it easier for merchants to accept them as a payment option.
3. By bringing stability and transparency to cryptocurrency purchasing power, stable coins will allow the market to grow faster.
They will also make investing much more attractive to investors who need predictable returns on their investments, not volatile growth that is unpredictable throughout the year.
4. Stablecoins will disrupt the idea that cryptocurrency is just for speculation.
Stablecoins will be an important part of the future economy and could eventually replace fiat currency.
5. Stablecoins can be used as a safe haven asset in countries where financial sovereignty is threatened by political or economic instability.
In times of crisis, people will probably resort to buying stable coins.
6. Stablecoins can be used as currency pairs for arbitrage purposes between exchanges, Stablecoins benefit exchanges by offering traders something to hedge against volatility with once they have exhausted their own margin trading balances. The aim in creating them is often to provide stability during volatile periods.
7. Stablecoins are backed by assets like gold, fiat currency, real estate etc. This makes them less volatile in general and more reliable than most cryptocurrencies which are not backed by anything other than code.
8. Since an amount of stablecoin is always equivalent to a certain value (fiat, gold etc.), they act as perfect derivatives in financial markets that require speculation on price changes.
9. A stablecoin is a digital currency designed to minimize the effects of price volatility.
10. A Stablecoin is a cryptocurrency whose price does not fluctuate much.
Conclusion | What Is A Stablecoin In Cryptocurrency
Stablecoins are needed because crypto-assets have become so volatile recently that they’re difficult to use as a means of exchange or store of value without many people being exposed to high risks.
With more governments talking about issuing their own cryptocurrencies, stablecoins will create a healthy competition between centralized and decentralized crypto currencies which can only bring positive results for investors.